Life & Health Insurance Exam Life & Health Insurance Underwriting and Risk Classification 3 — Questions and Answers
Question 1: A health insurance applicant with a pre-existing knee injury applies for an individual policy. Under ACA rules for individual and small group markets, how must the insurer handle this?
- Exclude coverage for knee-related claims permanently
- Charge a higher premium based on the knee condition
- Cover the condition without exclusion or premium surcharge (Correct answer)
- Require a 12-month waiting period before covering the knee
Correct answer: Cover the condition without exclusion or premium surcharge
The ACA prohibits pre-existing condition exclusions in individual and small group health insurance markets, requiring coverage without exclusions or surcharges.
Question 2: What does a 'table rating' system indicate in life insurance underwriting?
- The insurer's internal mortality table used for pricing
- A classification system for substandard risks where each table level represents an additional premium charge (Correct answer)
- The interest rate credited to a policy's cash value
- A state-mandated rating system for all life insurance products
Correct answer: A classification system for substandard risks where each table level represents an additional premium charge
Table ratings classify substandard risks by severity, with each table (often A–J or 1–10) representing an incremental percentage increase above the standard premium.
Question 3: Which aviation activity is MOST likely to result in a life insurance exclusion rider rather than an outright decline?
- Flying as a licensed commercial airline pilot on scheduled carriers (Correct answer)
- Performing aerobatics at air shows as a hobby
- Skydiving from personal aircraft weekly
- Piloting experimental aircraft without FAA certification
Correct answer: Flying as a licensed commercial airline pilot on scheduled carriers
Commercial airline pilots flying scheduled carriers are generally insurable; insurers may issue standard policies or attach aviation exclusion riders for private or hazardous aviation.
Question 4: Under the concept of 'adverse selection,' what behavior does life insurance underwriting primarily aim to prevent?
- High-risk individuals disproportionately purchasing insurance at standard rates (Correct answer)
- Insurance agents selling policies to unqualified applicants
- Insurers setting premiums too low relative to claims
- Policyholders lapsing their coverage prematurely
Correct answer: High-risk individuals disproportionately purchasing insurance at standard rates
Adverse selection occurs when higher-risk individuals are more motivated to buy insurance, which underwriting controls by classifying risks accurately.
Question 5: A life insurance applicant is a recreational scuba diver who dives to depths exceeding 100 feet. How is this activity most likely handled during underwriting?
- Automatically declined because scuba diving is uninsurable
- Rated or excluded via a scuba diving exclusion rider based on depth and frequency (Correct answer)
- Treated as a standard risk with no adjustment
- Classified as preferred due to the fitness benefits of diving
Correct answer: Rated or excluded via a scuba diving exclusion rider based on depth and frequency
Scuba diving beyond moderate depths typically results in a flat extra premium or an exclusion rider, depending on the insurer's guidelines and the diver's experience.
Question 6: What is the primary underwriting concern when an applicant for a large life policy recently changed beneficiaries to a non-family member?
- The policy may violate state assignment laws
- It may indicate a stranger-originated life insurance (STOLI) arrangement (Correct answer)
- Non-family beneficiaries are prohibited by most insurers
- It automatically triggers a mandatory medical examination
Correct answer: It may indicate a stranger-originated life insurance (STOLI) arrangement
Naming a non-family third party as beneficiary, especially on large policies, can indicate a STOLI scheme where investors finance premiums to profit from the insured's death.
Question 7: Which statement best describes the role of reinsurance in the underwriting process?
- Reinsurance replaces the primary insurer's underwriting guidelines
- Reinsurers assume a portion of large or unusual risks to help primary insurers manage exposure (Correct answer)
- Reinsurance is purchased by policyholders to cover primary insurer insolvency
- Reinsurers set the final premium rates for all substandard risks
Correct answer: Reinsurers assume a portion of large or unusual risks to help primary insurers manage exposure
Reinsurance allows primary insurers to transfer a portion of their risk to reinsurers, enabling them to accept larger policies and unusual risks without excessive exposure.
Life & Health Insurance Exam Life & Health Insurance Underwriting and Risk Classification 3
A health insurance applicant with a pre-existing knee injury applies for an individual policy.
Under ACA rules for individual and small group markets, how must the insurer handle this?